3 Stocks to Buy on Shale Gas Boom

Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Engineering & Construction (E&C) companies have been a bright spot in the industrial space, especially after the shale gas boom opened up multi-billion dollar investment opportunities in the infrastructure arena. In fact, Goldman Sachs believes that energy infrastructure stocks are expected to attract $57-65 billion in five projects, namely gas processing, fractionation, petrochemicals, LNG exports and gas power. Apart from that, there are some stock-specific characteristics as well that have helped keep investors interested. Let’s have a look at some E&C companies:

Chicago, Bridge & Iron (NYSE: CBI)

CBI remains one of the best positioned E&C to benefit from the investment in the energy infrastructure space. Apart from that, the company’s deal with SHAW group is still considered to be a bullish move. Though the Street remains cautious over the size of integration, there are still a lot of positive comments on the potential earnings power of this deal (expected to be $0.80 per share in 2014). SHAW is expected to increase the end market breadth for CBI, especially in the nuclear energy sector.

In addition, CBI’s end markets are performing above expectations, and the management’s bookings guidance of $7-10 billion seems to reflect the confidence that the management has in its momentum of winning awards. The only risk seems to be the timing of winning of large oil & gas projects. However, the company seems to have a cushion in the form of small and medium-sized award activity that is expected to support a gradual growth in the backlog till the time large projects are won.

Fluor (NYSE: FLR)

Fluor is another bright name in the E&C industry. In fact, some believe that this company has the best earnings visibility among E&C players. The company remains a potential winner for many North American petrochemical and gas-to-liquid projects, given its rich history of successfully performing such projects. These projects are expected to start to ramp up in the second half of this year. Flour’s Industrial & Infrastructure (I&I) backlog is also expected to improve with the help of increased infrastructure opportunities. Flour’s mining segment has been criticized given the soft demand in the current mining environment. However, the recent mining award activity shows that the demand in the mining marker may not be soft after all. Oil & gas margins are expected to have bottomed out since the margins in the backlogs are improving.

The valuation seems reasonable as well. The graph shows the capital appreciation witnessed by different E&C players over the last twelve months:

The chart shows that Fluor hasn’t witnessed much growth. Moreover, history tells us that Fluor traded at a 30% premium to the S&P at a similar point in the previous cycle back in 2006-07. However, now the stock is only trading at a 10% premium to the S&P.

Another stock that has not yet experienced growth is KBR Co. (NYSE: KBR). KBR remains another favorite in this space to benefit from the shale gas boom. KBR’s track record tells us that the company will be a major beneficiary of the multi-billion dollar investment cycle in the energy infrastructure stocks. Some of the projects that the company has already won in the respective fields are stated below:

Foolish Bottom Line

Despite the recent rally in this space, the E&C industry still has a lot of potential, especially in natural gas-related infrastructural development where the industry is expected to attract billions of dollars. 


Zain Abbas has no position in any stocks mentioned. The Motley Fool owns shares of Fluor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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